Impact Investing As an Effective Strategy for Inclusive Growth

The Nigerian economy is currently the largest in Africa with a GDP of $594.257 billion but has an alarming rate of poverty which has grown from 27% in 1980, to 46.5% of its entire population in 2019. Impact investing has therefore been proposed as an avenue for bridging the inclusive growth gap that currently exists.

Impact Investing can be defined as building profitable businesses around social problems, such that the businesses make money from creating a positive social impact. Traditionally, profitability and social concerns were perceived to belong to the two dichotomous worlds of profit seekers and NGOs respectively. The Impact Investing model, however, shows that both goals are compatible as Impact Investing involves for-profit businesses with a social mission.

Why is Impact Investing Important?

According to Andrew Carnegie in the Blue Print to Scale report, “Pioneering don’t pay.” Firms that are pioneering new business models shoulder a heavy burden, particularly in the Bottom of the Pyramid (BoP) environment. By definition, these firms are blazing new trails rather than following the well-worn paths established by others. They develop and refine their models the hard way, by trying them out in the unforgiving, low-margin marketplace, inevitably suffering failures and setbacks on the road to viability. Often, investments are heavy on educating customers about the possibilities of new solutions and in developing unskilled suppliers and fragmented distribution channels to serve their requirements.

Although excited by their novelty, investors are often rattled by these firms’ risk profiles and are unimpressed by their financial returns, all the while suspecting that they might actually be savvy non-profits masquerading as commercially viable models. These are tough challenges that call for strong support. However, knowing how to best support a pioneer company requires a firm understanding of its needs, which change as the company evolves over the course of its journey from start-up to eventual scale.

Building more inclusive economies means putting greater emphasis on appropriately valuing the inputs and outcomes of the current market and business systems that are most relevant to the poor and vulnerable. Arriving at more equal outcomes will be no easy task, therefore, stakeholders – private, public and civil society will have to work together in ways to advance opportunities that promote broader wellbeing. An example of this is the Rockefeller Foundation which embarked on an ambitious initiative to expand opportunities for more broadly shared prosperity by catalysing the potential for impact investing.

Some estimate that the total value of impact investing is less than $40 billion in comparison to the tens of trillions of global investment dollars; however, Africa is seeing a larger percentage of that amount every year. The challenging question, however, is whether impact investing is a potential solution to transform Africa’s growing employment into the potential for more inclusive economies across the continent.

 

Impact Investment & Socio-Economic Growth

Impact investment uses business as a means to solve social problems. It ensures that businesses achieve a triple-bottom-line; social, environmental and economic goal. It thereby bridges the gap between aggressive economic growth and lagging social development. It differs from traditional Corporate Social Responsibility (CSR), which usually entails the donation of a percentage of business profits to a social cause, such that the social concerns are considered only after the core business. Impact investing, on the other hand, incorporates social impact as part of the core strategy of the business.

The International Finance Corporation (IFC), a member of the World Bank Group, is working to make it easier for institutional investors who hold nearly $100 trillion in assets under management worldwide to enter the fast-growing Impact Investing market and contribute to achieving the Sustainable Development Goals by 2030. The IFC has also introduced draft principles that are designed to become a market standard for impact investing—in which investors seek to generate a positive impact for society alongside strong financial returns. IFC, the world’s oldest and largest impact investor, led the development of the principles, in partnership with leading asset managers, asset owners, asset allocators, development banks, and financial institutions.

The market for impact investing—currently $228 billion—has grown fivefold since 2013 as investors align their investment strategies with the Sustainable Development Goals and the Paris Climate Agreement. According to the ‘Investing for Impact: A strategy of choice for African Policymakers’ report, the potential of impact investing as a solution to problems such as lack of sufficient agricultural productivity as well as limited access to affordable basic services such as clean water, education and power should be explored for inclusive growth.

Policymakers can direct capital in powerful and transformative ways if they use Impact Investing as a tool to complement the other policy instruments. Job creation is one of the most pressing challenge policymakers in Africa face today. It is projected that the working population in Africa is expected to exceed China and India by 2040. With 500 million people of working age in Africa today, there are 11 million youth entering the workforce every year for the next decade. Using the Global Impact Investing Policy Project Framework for policy analysis, the following recommendations have been put forward by the Africa Private Equity and Venture Capital Association (AVCA) and Bridges Venture as ways of addressing Impact Investment barriers.

  • Impact Investing Task Force; that addresses the lack of awareness of the concept of impact investing. In Senegal for example, the Presidential Investment Council commenced a conversation that led to the establishment of the Impact Investing Working Group, tasked with the responsibility of proposing reforms to increase opportunities for impact investment and social entrepreneurship.
  • Catalytic Capital; that addresses the lack of investment vehicles. Policymakers can direct government resources to new investment intermediaries that will, in turn, stimulate further investment. Ghana set up the Ghanaian Venture Capital Trust Fund in this regard.
  • Regional SME Exchange; limited exit options impede new investment activity across the spectrum of financial and impact return expectations. Policymakers can establish regional exchanges to provide necessary liquidity and exit options necessary to grow small enterprises. A number of countries are considering reforms that would lead to an acceleration of SME listings.
  • Flexible Regulation; by better regulating institutional investment, policymakers can ensure that investments address key development challenges. Pension funds in Africa offer a huge opportunity in this regard but regulators have been slow to respond, preferring to default to a conservative investment philosophy. However, Ghana liberalised its pension scheme so that up to 3% of the Social Security and National Insurance Trust can be invested in private equity vehicles. More of such initiatives are necessary.
  • Priority Procurement; procurement rules and practices when designed to optimise impact can address problems of poor policy coherence. However, implementation is key. In Kenya, a policy to allocate 25% of government procurement spend on SMEs has not yet resulted in the kind of transformation that the government would like to see, whereby SMEs would boost productivity and ultimately job creation across the country.
  • Guarantee Program; government-funded guarantee programs offer another solution to the barrier of limited finance to grow business. Several governments across the continent including Kenya through the Kilimo Biashara and Nigeria through Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) have created public-private partnerships that help de-risk investment and unlock additional private capital. As with catalytic capital intermediaries, these government initiatives are steps in the right direction but are dwarfed by the scale of the challenge they are designed to address.

In conclusion, the disparity between aggressive economic growth and lagging social development has led to the growth of societal ills and poverty. Impact investing, therefore, provides a means to bridge the gap between economic growth and social development. It should, therefore, be given the attention it deserves, by policymakers and other stakeholders. Areas of growth such as Infrastructural projects, broadband penetration and ICT, access to markets for agricultural produce, health and sanitation projects, skills acquisition for the youthful population and the power sector represent Impact Investment focus that can generate wealth in a manner that spurs inclusive growth and accelerates the achievement of sustainable socio-economic development.

This article is an excerpt from CSRFiles Journal on Impact Investing Vol 4, Issue 2, Oct, 2014.

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